New Government Likely In Greece, Depositor Bail-In Still Possible, Deutsche Bank Says

Over the weekend, the entire world looked on in horror
as Alexis Tsipras - who just days earlier secured a crucial referendum victory
which by all accounts empowered him to ride into Brussels a conquering hero -
was eviscerated by German FinMin Wolfgang Schaeuble and several like-minded EU
finance ministers who smelled blood last Thursday after Greece submitted a
proposal that betrayed the Greek PM’s lack of conviction.

As outlined exhaustively here over the past 24 hours,
the new “deal” for Greece has implications far beyond the Aegean and may well
mark the beginning of the end for the EMU experiment, for although the Greek
drama highlights the need for a fiscal union to compliment the common currency,
the "bargaining" stance adopted by Germany makes it far less likely
that financially weaker states will be willing to turn over their fiscal
affairs to Brussels.

But leaving the bigger picture implications aside for
now, the two most important short-term considerations for Greece are:

1) establishing
political stability, and

2) stabilizing the banks.

Neither of these will be easy.

In fact, both could prove to be rather monumental
tasks. With Tsipras facing a party revolt and the Greek banking sector facing
outright insolvency, Deutsche Bank has more on politics and bank
"normalization."

* * *

From Deutsche Bank

Next Greek steps

On the political side, statements from Greek PM
Tsipras following the conclusion of the summit indicate a desire to take
ownership of the "difficult" agreement, despite the large concessions
made. We would consider this as significant, as the PM still commands a
meaningful degree of influence in Greek public opinion as well as within the
SYRIZA party itself. Following Saturday's authorization vote in the Greek
parliament, at least 32 government MPs have indicated they would be unwilling
to support an agreement, effectively leading to a loss in the government's
parliamentary majority. The support of Independent Greek junior
coalition member also remains to be seen following negative statements on a
potential agreement from party leader Kammenos overnight, effectively leading
to a potential loss of more than 40 MPs from the government coalition.

As such, we would consider a minority or national
unity government as the most likely outcome following the Greek PM's return to
Athens later today. A minority government would involve a major cabinet
reshuffle by the Prime Minister with the departure of dissenting cabinet
ministers (most notably energy minister Lafazanis) and the replacement by more
politically-neutral members. Opposition support would remain at arm's
length, to be provided by New Democracy, River and PASOK controlling more than
100 MPs. Combined with support from moderate SYRIZA MPs, this would generate a
parliamentary majority of at least two-thirds. The alternative outcome would be
a government of national unity with more active involvement by pro-European
parliaments in the cabinet re-shuffle as well.

Whether Greek PM Tsipras would remain in his position
under such a government remains to be seen, but party leader statements so far
suggest that this may be acceptable. Either way, PM Tsipras will have to take
decisions on how the SYRIZA party membership and parliamentary group is likely
to change in coming days: press reports that he is likely to ask for dissenting
MP resignations, to be replaced by more moderate MPs, inclusive of outspoken
Speaker of the House Konstantopoulou who also expressed disagreement over the
weekend. Whether dissenting SYRIZA MPs resign or form a new anti-euro
parliamentary grouping remains to be seen.Either way, it is likely
that the new government's mandate is implicitly or explicitly set to run until
the signing of a new ESM agreement by September, to be followed by a new election.
Greek politics are now likely to shift to more well-defined political
narratives, ultimately distinguished by party positions on euro membership
rather than austerity.

Bank normalization will take time

In terms of the Greek banking sector, immediate
decisions will need to be taken given the exhaustion of the ECB ELA buffer. An
immediate increase in the ELA cap would allow continued rationing of cash from
ATMs in coming days. It is possible the ECB waits for such a decision on
Wednesday, when the ESM negotiations formally re-open and there is a
"credible perspective" for the conclusion of the review. (ZH:
it does indeed appear the ECB is waiting until Wednesday at least). More
broadly, the return to a more normally functioning banking system in Greece
with fewer restraints on liquidity will likely depend on the timeframe of a new
bank recapitalization program. The Euro leaders statement highlights that this
will require a comprehensive recapitalization exercise following the
transposition of the Bank Recovery and Resolution Directive in Greek
legislation. At face value, this suggests that the possibility of depositor
bail-in cannot be ruled out given the directive's provisions.In
practice, it is unlikely that there are a significant number of deposits above
the directive's 100k legally protected limit implying that this may be avoided. Still,
bank recapitalization is unlikely to take place until after the summer. In the
meantime, the ECB will require bank solvency assurances to maintain financing
of the Greek banking system and continue to increase ELA, particularly given
Greek bank's declining collateral availability, likely at around 5bn EUR under
the current ELA haircut schedule.ECB financing in coming months will likely
need a front-loaded disbursement of ESM guarantee funds in an escrow account or
an alternative "bridge guarantee" financing method. Either way, it is
unlikely that capital controls are lifted soon.

* * *

As you can see, a government reshuffle (something
we've predicted for months) is imminent although it is as yet entirely unclear
what the political landscape will look like in six months and indeed it's not
at all clear whether Tsipras will survive the melee.

As for the banks, well, they're essentially wandering
aimlessly through a minefield. For those interested in a detailed account of
the challenges that lie ahead for the Greek banking sector, see "Greek Banks Not Out Of The Woods,
May Impose Tougher Capital Controls." The short version is simply this: Lacking
sufficient collateral to keep the ELA game up for much longer, Greece's banks
will need to be recapitalized in short order barring a dramatic decrease in ECB
haircuts. Even in the most optimistic scenario, capital controls are likely
here to stay for the foreseeable future.

assange

At midday on Friday 5 February, 2016 Julian Assange, John Jones QC, Melinda Taylor, Jennifer Robinson and Baltasar Garzon will be speaking at a press conference at the Frontline Club on the decision made by the UN Working Group on Arbitrary Detention on the Assange case.